Tuesday, January 27, 2015

The Net Neutrality Controversy: A Historical Perspective


I’m a history buff by late night, not unlike some others who spend most of their days involved with communications law and policy. Indeed, one of the history buffs I have in mind has written a book about the special role the telegraph played in winning the Civil War. Before this particular person came to occupy his present high government office, I highly commended his book to you in this piece, “Tom Wheeler, Historian at the FCC’s Helm.”

At the very end of the May 2013 piece, I concluded:

But it does not seem out of place to suggest that Mr. Wheeler, a Lincoln scholar and someone who has observed closely the dramatic changes in the increasingly competitive communications marketplace, may well draw inspiration from Mr. Lincoln's injunction to jettison past dogmas, and to think anew, and to act anew. Certainly the FCC could benefit from ridding itself of outdated regulatory dogmas developed in a bygone monopolistic era, and from thinking and acting anew.

Of course, history lends itself to different interpretations. Understanding the past is not the same as solving an algebraic equation.

Here are a just a few of my favorite short quotations regarding understanding history or the past:

“The past is never dead. It is not even past.” – William Faulkner

“History is indeed an argument without end.” – Pieter Geyl

“The one duty we owe to history is to rewrite it.” – Oscar Wilde

“To know nothing of what happened before you were born is to remain ever a child.” -Cicero

Now, each of these quotations, in its own way, calls to mind, at least for me, particular aspects of the decade-long fight concerning the imposition of net neutrality mandates on Internet providers. I’ll let you ponder them. I suspect that for many of you, thinking about each one – in the context of the net neutrality fight – will cause you to nod your head, perhaps even smile.

But here is another famous quote concerning history, perhaps the most famous of all:

George Santayana, the philosopher, poet, essayist, and novelist, said: “Those who cannot learn from history are doomed to repeat it.”

I was especially reminded of Santayana’s admonition while watching last week’s net neutrality hearing. Ranking House Communications Subcommittee Member Frank Pallone asked NCTA’s Michael Powell – a former FCC Chairman – how we should evaluate the argument that Title II will stifle innovation and investment. In response, Mr. Powell turned to a bit of history that, inexplicably, has been mostly absent from the net neutrality debate. Mr. Powell said, in part: “[A] careful examination historically over periods of regulatory intervention versus periods of light regulation will demonstrate a clear pattern. In the wake of the 1992 Act when cable rates were regulated, investment was depressed for several years until the prospect of the 1996 Act, which deregulated those rates again, and [investment] soared.”

Among other things, the 1992 Cable Act imposed a new rate regulation regime on cable operators. In fairly short order after the FCC began to implement it, a fairly widespread consensus formed that the new cable regulations were adversely impacting investment, service quality, and consumer choice. Even Reed Hundt, the FCC Chairman at the time, and not one otherwise lacking in pro-regulatory sentiment, quickly grew disillusioned with the new regulatory regime. In his book, “You Say You Want a Revolution,” Mr. Hundt acknowledged that whatever benefits consumers gained from the modest price reductions were outweighed by “billions in foregone capital investment” by the cable operators. By late 1994, Mr. Hundt agreed that the cable rate regulation regime that had only recently been adopted in the name of consumer welfare should be largely eliminated.

Tom Hazlett, a former FCC Chief Economist, now at Clemson University, is widely recognized as one of the nation’s foremost authorities regarding telecommunications economics, especially with regard to cable operators. Here is what he had to say in his 2003 article, “The Irony of Regulated Competition in Telecommunications,” published in the Columbia Science and Technology Law Review:

But cable rate regulation was unsuccessful. Nominal rates were suppressed by the FCC; average household bills in October 1994 were about 10 percent below where they would likely have been in the absence of controls. But service quality suffered, as cable network ratings plummeted and investment in system upgrades ground to a halt. The Commission quickly reversed course in November of 1994, allowing generous rate hikes under the “control” scheme. It was an explicit attempt to improve cable operator incentives to add new channels, to pay higher licensing fees for enhanced programming on existing networks, to expand physical infrastructure, and to improve customer service.

Mr. Hazlett declared, presciently, that “[r]etail price controls in cable offer more than an illustrative analogy; they connect directly to the substance of the broadband debate.” At bottom, he concluded, “rate regulation suppresses investment, deployment, and inter-modal competition.”

In the late 1990s and early 2000s, this deregulatory view regarding broadband policy became widely shared – and on a bipartisan basis. Indeed, it was the Clinton Administration that early on articulated a policy against subjecting the then-emerging broadband Internet providers to public utility-style regulations.

In 1999, in opting not to require a public utility-style “open access” regime for cable broadband, Clinton-appointee FCC Chairman William Kennard declared: "[T]he alternative is to go to the telephone world, a world that we are trying to deregulate and just pick up this whole morass of regulation and dump it wholesale on the cable pipe. That is not good for America."

I am surprised that there has not been more focus on the adverse effects on investment, service quality, and consumer choice that followed implementation of the 1992 Cable Act rate regulation regime because these adverse effects were widely acknowledged. In the context of the present net neutrality debate, the episode is worthy of more comment. (It won't do to suggest that the proposed Title II public utility regime for Internet providers is not primarily focused on rate regulation. Any such suggestion is wrong, as I can easily show if need be. For now, I will simply point to the proposed ban on “paid prioritization.” What is such a ban if not a form of rate regulation?)

Sadly, it now appears that the early bipartisan consensus concerning the wisdom of that light-touch broadband policy has broken down. In the words of Mr. Kennard: “This is not good for America.”

And in the words of Santayana: “Those who cannot learn from history are doomed to repeat it.”

This is true even for historians of the telegraph – which has long since been relegated to (telecom) history’s dustbin.

Friday, January 23, 2015

Florida Governor Plans to Cut Wireless Taxes

Earlier this week, Florida Governor Rick Scott announced his plan to cut $470 million in cellphone and television taxes. The plan would decrease tax rates on cellphones and television by 3.6 percent and would save the average Florida family $43 a year. Currently, Florida residents pay the fourth highest wireless tax rate in the country when including federal, state, and local taxes. Only New York, Washington, and Nebraska have higher wireless tax rates.
This proposal from Governor Scott is a step in the right direction towards incentivizing more Florida residents to adopt Internet service. As I wrote in an October 2014 blog, wireless taxes are very regressive because over 56 percent of all poor American adults had only wireless service as of December 2013. It is important that taxes on Internet access are as low as possible in order to push prices to an affordable level so every willing consumer can get online.
Wireless networks are rapidly becoming the future of broadband throughout the United States, but high tax rates slow down the pace of deployment of wireless infrastructure. The reductions in the quantity of service demanded by consumers decrease the incentive for providers to invest in infrastructure.

The transformation in wireless networks has been incredible over the past ten or more years (2G, 3G, 4G), as more and more consumers have demanded higher speed services. For this progress to continue, more states should adopt similar plans to Governor Scott’s and substantially decrease the rates of wireless taxes.

Thursday, January 22, 2015

Title II Regulations Would Negatively Impact Jobs

Last week, Will Rinehart released a report entitled “Title II Reclassification Negatively Impacts Jobs and Investment.” This report provides additional evidence regarding the impact of Title II regulations on employment to a Perspectives from FSF Scholars that I wrote in December 2014 entitled “Title II Would Not Just Harm Consumers, It Would Harm Workers Too.”
Rinehart used investment data from a paper by Kevin Hassett and Robert Shapiro entitled “The Impact of Title II Regulation of Internet Providers On Their Capital Investments,” which I blogged about here. Among many of the Hassett and Shapiro’s findings, one was that Title II regulations would decrease investment by $11.8 billion in 2019, the final year of their estimation. Using a multiplier provided by the Bureau of Economic Analysis, Rinehart calculated that an investment decline of $11.8 billion in 2019 would result in 174,233 fewer jobs than what would exist if Title II regulations were not adopted. Rinehart also made the following clarification:
           Since the US has an extremely dynamic labor market and due to the very nature of multipliers, investment could shift toward other industries, so this number applies only to broadband employment. However, the forgone investment would also come at the expense of highly technical careers, which would ultimately limit positive spillovers like new companies in these evolving markets.
As I mentioned in a blog in early January, the increased fees that would be required from Title II regulations should depress investment by more than the amount Hassett and Shapiro projected, because as the price of broadband increases, the amount consumers demand decreases. This would disincentivize Internet Service Providers from investing and could ultimately lead to even more jobs lost, and/or jobs displaced into other areas of the economy.
The following quote from Title II Would Not Just Harm Consumers, It Would Harm Workers Too” sums up how the FCC regulators and elected officials should approach Title II:
If a regulation (that does not correct for a market failure) affects employment and wage levels in the market (whether up or down), the impact should be seen as a negative effect on the economy. If these shifts in the labor market were a positive market outcome, they would have occurred absent the regulation.
“Jobs!” should not be a mere political slogan. Public officials, including regulators, should focus on the impact of regulations on employment. Any public official who says he or she wants a healthy labor market should be against Title II reclassification because such regulations likely would have serious negative impacts on many workers.
Job reallocation is not a positive impact of regulations and this report by Will Rinehart provides further evidence to the negative impacts of Title II regulations on investment and employment.

Wednesday, January 21, 2015

Flight-Sharing is the Latest Market on the Wrong End of Government Regulation

Flight-sharing is one of the latest services to emerge within the new “sharing economy.” Flytenow, a flight-sharing company, connects passengers with pilots who have empty seats on private flights for a fraction of the flights’ costs. Like Airbnb and Uber, which connect travelers with shelters and passengers with drivers, respectively, Flytenow can provide valuable services at the touch of a smartphone.
Sharing services, like these, provide additional consumer choice by disrupting traditional business models, and the emergence and popularity of such services has signaled to entrepreneurs that additional innovations are in demand. The new sharing economy services lead to increases in productivity for the overall economy and cost savings for consumers. For example, according to an Airbnb report on its impact in NYC, the company’s low prices have led to guests staying longer than they would have in a hotel. The average NYC Airbnb guest stays 6.4 nights, while the average NYC hotel guest stays 3.9 nights. These longer stays within the five boroughs have led to an additional $632 million in economic activity in one year in NYC alone.
Airbnb and Uber have come under regulatory scrutiny from many state and local governments (see here). Now, Flytenow is currently being regulated at the Federal level. According the Wall Street Journal, Flytenow is challenging the Federal Aviation Administration (FAA) in Federal court over the agency’s effective ban on its flight-sharing services.
Flytenow argues that it is not breaking any Federal laws or regulations because the FAA has always allowed private pilots to advertise flights and attract passengers as a means to cut down on expenses. But instead of using bulletin boards or newspapers, which apparently was legal in the past, users of Flytenow are advertising through the Internet. The FAA says that flight-sharing companies, such as Flytenow and Airpoolers, are subject to the regulatory standards that apply to commercial flights.
But Flytenow specifically sets forth the FAA regulation on its website: “Federal Aviation Administration regulations prohibit a pilot from accepting compensation from passengers. We help you split the costs, but you are not allowed to compensate the pilot further than that.” Flytenow argues that this cost-splitting operation makes flight-sharing services completely legal under Federal law.
It is understandable for regulators and government agencies to be cautious with regard to emerging technologies in order to protect consumers from certain identifiable risks.  But preemptive regulations often end up harming consumers by eliminating valuable services. As discussed in a Perspectives from FSF Scholars entitled “The Sharing Economy: A Positive Shared Vision for the Future:”
If purveyors of sharing applications engage in harmful, unhealthy, or unsafe activities, competition is probably the most important regulatory mechanism to address any real problems. In competitive markets, poor consumer satisfaction generally means that a company will lose market share, or even fall out of the market. If a company is not operating safely or if it is putting its users in unhealthy conditions, a competitive market allows for unsatisfied consumers to choose alternatives.
It should not be unreasonable to think that flight-sharing services could operate in a similar manner to ride-sharing and shelter-sharing services. Hosts, drivers, and pilots should be able to price their services based on supply and demand. In the “The Sharing Economy: A Positive Shared Vision for the Future,” Free State Foundation President Randolph May and I suggested the following:
If the laws or regulations applicable to the existing incumbent businesses no longer make sense today, they should be changed. It always harms consumers when public policymakers attempt to “level the playing field” by subjecting entities to regulatory restrictions that are not needed. The proper way to respond to “level the playing field” claims is to remove unnecessary regulations wherever they apply, not to expand them to new entities.
It is important for regulators to consider the costs and benefits of sharing services before restricting or outright prohibiting them. Preemptive regulations often lead to less consumer welfare than light-touch regulatory regimes that promote market-driven solutions that satisfy consumer demand while still providing redress for identifiable consumer hams. 

Wednesday, January 14, 2015

President Obama Wants More Government-Run Broadband Networks

On Tuesday evening, President Obama released a video on the White House Facebook page endorsing municipalities to provide broadband networks. On Wednesday afternoon, he will give a speech in Iowa outlining the contents of the latest report from the Executive Office of the President entitled “Community-Based Broadband Solutions: The Benefits of Competition and Choice for Community Development and Highspeed Internet Access.”
As FSF Scholars discussed in their comments to the FCC back in August, the FCC lacks the legal authority to preempt state laws restricting municipal broadband networks. These comments and additional FSF blogs (here and here) have outlined why municipal broadband inherently creates an anticompetitive market, because municipalities do not operate through profit and loss, placing large burdens onto taxpayers.
Additionally, a former classmate of mine at George Mason University, Brian Deignan, recently wrote a paper entitled “Community Broadband, Community Benefits? An Economic Analysis of Local Government Broadband Initiatives,” which was also blogged about at Tech Liberation Front. In his paper, he empirically found that municipal broadband networks have very modest positive effects on the economy, if any, while the growth in local government and burden on taxpayers are too large to ignore.
Increasing high-speed Internet access throughout the country is an admirable goal. But instead of the government providing access, the focus of the government should be to reduce regulatory barriers at all levels to pave the way for private providers to increase high-speed broadband access. 

Tuesday, January 13, 2015

It’s the Consumer, Stupid! – Part III



In a recent post, Susan Crawford once again is railing against so-called “zero-rating” broadband plans which allow consumers to access certain websites on a free or discounted basis. Although these “zero-rating” and “sponsored data” plans have proven popular with consumers, Professor Crawford claims that they are actually bad for consumers. And she wants them banned pursuant to her understanding of what “net neutrality” regulation should require.

Under Professor Crawford’s vision of the way the Internet should work – or, I should say be “modeled” or “planned” or “mandated” by government regulators – all broadband Internet providers’ plans should be required to provide access to all subscribers to all websites at all times. In other words, Internet providers should not be allowed to offer, as T-Mobile and Sprint currently offer, plans that provide wireless consumers access to a whole bunch of popular music sites without the incurrence of data charges or access to a limited number of popular websites (such as Facebook and Twitter) at deeply discounted rates. And AT&T should not be allowed to offer its “sponsored data” plan under which a content purveyor, say, ESPN, rather than the consumer, is billed for data charges that otherwise would be incurred by the consumer visiting the website.

Professor Crawford claims these “zero-rating” and “sponsored data” plans are “pernicious,” “dangerous,” and “malignant.” Frankly, I’m glad she thinks so. Because her advocacy on this point just serves to illustrate the real pitfalls of net neutrality advocacy run amok.

Or, to put it another way, Professor Crawford’s opposition to any form of “zero-rating” serves to illustrate how, in her view, the absolutist objective of total access uniformity must prevail over any other business model that consumers might find attractive, however slightly such model may diverge from Professor Crawford’s notion of total access uniformity.

Or to put it still one more way: Professor Crawford is cocksure she knows what’s best for consumers regardless of whether they might disagree.

We spilled considerable ink last year – I still like the ring of that as I “hunt and peck” away – explaining why net neutrality advocates’ argument that the government should ban “zero-rating” or “sponsored data” plans should be rejected. I don’t want to repeat all of those arguments here, so below you will find links to seven different pieces that address the subject in greater or lesser fashion. I especially call your attention to the “It’s the Consumer, Stupid! – Part II” and “Net Neutrality v. Consumers.”

Here’s what I said at the end of “Net Neutrality v. Consumers” about opposition to zero-rated plans:

“I maintain that the vast majority of consumers, if asked the question in a fair way, would say they are pleased with the additional choices they now have available under the Sprint and T-Mobile plans. I suspect they would say they are not aware that self-designated consumer representatives have opposed these very plans in their name.”

I remain confident today that this is true.

Please see:
And if you care for more, Daniel Lyons’ Tech Policy Daily piece, published yesterday, is a very good direct response to Professor Crawford.

Friday, January 09, 2015

PITFA Introduced in the House

House Judiciary Committee Chairman Bob Goodlatte (R-Va.), Congresswoman Anna Eshoo (D-Calif.), Subcommittee on Regulatory Reform, Commercial and Antitrust Law Chairman Tom Marino (R-Pa.), Congressman Steve Chabot (R-Ohio), and Congressman Steve Cohen (D-Tenn.) have introduced H.R. 235, the Permanent Internet Tax Freedom Act (PITFA). Last Congress, the House of Representatives passed PITFA by voice vote.

While the Congress extended the Internet tax moratorium last year, a permanent ban on should Internet access taxes should be adopted. The introduction of H.R. 235 is a good first step.

This is a piece of legislation that will be good for the economy that should be accomplished on a bipartisan basis.